Q4 2021 Willdan Group Inc Earnings Call
Good day and welcome to the will Damn group fourth quarter and fiscal year 'twenty 'twenty. One earnings Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Mr. Al cash chalk VP Investor Relations. Please go ahead Sir.
Thank you Tony Good afternoon, everyone and welcome to <unk> group's fourth quarter and fiscal year 2021 earnings call.
Joining our call today, our Congressman chairman of the board and Chief Executive Officer.
I'm <unk>, Chief Financial Officer, Mike Sievert President.
The call today is built on our earnings release, we issued after market close today.
You may find the earnings release and the Investor report.
That accompanies today's call and the press release and stock information section of our Investor Relations website at IR <unk> com.
Tom.
Management will review prepared remarks, and then we will open the call up to your questions.
Statements made in the course of today's conference call, including answers to your questions.
We are not purely historical are forward looking statements within the meaning of the.
<unk> Securities Litigation Reform Act of 1995.
Forward looking statements involve certain risks and uncertainties and it is important to note that the companys future results could differ materially from those in any such forward looking statements.
Factors that could cause actual results to differ materially and other risk factors are this is from time to time in the company's SEC reports, including but not limited to the annual report on Form 10-K filed for the year ended January 1st 2021.
<unk> cautions investors not to place undue reliance on the forward looking statements made during the course of this conference call will have disclaims any obligation and does not undertake to update or revise any forward looking statements made today.
In addition to GAAP results. We'll then also provide non-GAAP financial measures.
Believe enhance investors' ability to analyze the business trends.
And performance.
<unk> GAAP measures include net revenue.
Adjusted EBITDA and adjusted EPS, Tom I will turn the call over to you.
Thanks, Al and good afternoon, everyone.
We continue to build post COVID-19 momentum.
Quarter end of year delivered results well ahead of our internal estimates.
We see positive signs that the initial impacts of COVID-19 are behind it.
As stated previously all our contracts have restarted and access to customers in all geographies we serve.
I would like to repeat that no contracts were cancelled a revenue only moved out in time.
Looking back at the year, we adapted well to the virtual work environment.
As a services firm our employees found many benefits working from home.
Most of our customers will be back in their offices over the next few months. We also expect our employees to return to a hybrid model.
Our current challenge is wrapping up the California IOU contracts there.
There are three key points I would like to make to help investors understand <unk> position coming out of this pandemic.
We have a record backlog of approximately $1 5 billion.
When you look at this as simply as three years of work.
Thus, we conclude that winning work is not the priority for many parts of this of the organization.
Priorities are wrapping up.
Growing organically executing and collecting the money fast enough to offset the capital needs of organic growth.
The second point is how the customers respond post covered to energy efficiency.
We think we have a pretty good idea at this point.
They are really small businesses are struggling for the most part utilities are looking at how to help them.
Our largest energy efficiency contracts, Los Angeles Department of water and power L. A DWP sorry, the Los Angeles area has now exceeded the weekly pre Covid revenue.
Simply stated we are doing more now than before Covid.
This tells us that the commercial customers are buying energy efficiency.
We expect to ramp this contract more throughout the year, because we have excess budget that was not spent during COVID-19 .
The third part is we have an all time high head count of 1560 people, which is a 15% increase.
At the same time, we only had 4% organic growth for the year.
As we have ramped up in personnel to deliver the California programs. So that's <unk>.
Planned substantial revenue will not follow answer the second half of 2022.
Looking at the rest of the operations that generic consolidated construction management. They are all well positioned for 2022.
We do expect as Kevin pointed out previously stated 2022 assay ramp throughout the year, mainly because of this late start and a rapid on the California contract.
In summary, we have the work and proof.
The customers are buying energy efficiency.
We also have all the people the processes the tools the knowledge and experience to execute the contracts, we expect about 20% organic growth in 2022.
Looking a little deeper.
The market for reducing carbon continues to grow.
Electrification that being converting carbon fuels to electric is growing.
The low student electrification electric vehicles will be increasing for the utilities.
Demand for energy efficiency will continue to be strong.
As an example, we are starting a New York City housing authority facility. This $90 million three year design build contracts reduces infrastructure related carbon in New York City.
This new first of its kind program, introducing innovative electrification measures, specifically lower their carbon footprint and improve existing infrastructure and public health.
Well they are tactical approach was selected competitively above all others and has application across the United States.
We've also started a two year 75 million dollar design build project.
Silly.
For facility improvements for the Pueblo County School District 70.
Dan will provide engineering and construction management to update 19 schools and for district buildings in 2022, we expect our construction management revenue to.
Approximately $78 million to $1 50.
We have also gained ground in the IOU market, we were awarded a five year $24 million energy efficiency program for a large middle at mid Atlantic Investor owned utility, we'd beat our major competitor to grow into this new geographic territory.
We are also wanted expanded recompete with national grid in New York.
Our programs have not been immune to the disruptions in the supply chain and overall cost inflation in.
In terms of procurement, we are seeing delivery schedules extended from a cost inflation perspective, we expect to see salary inflation as well as higher materials and equipment costs. The latter we expect to recover.
We are building.
Our building.
This potential disruption to our delivery schedules.
The last few years of cohort had felt very stagnant most.
Most of our efforts have been on surviving and adapting 2021 demonstrated where emerging stronger.
Our position in that clean energy space is strong.
<unk> in New York, California, and a progressive carbon states is strong.
We expect this year in the future years to be our best years.
We have been working many years to build the foundation of all that our team of people and diverse capabilities. It is exciting to watch.
There are growing opportunities of this clean energy disruption is accelerating.
Well that is well positioned.
Covid is behind us and now back to the business of growing the company.
Thank you to our employees and shareholders for their perseverance and tenacity over the last few years I will now call I will now turn the call of the cap.
To discuss our financial results.
Yes.
Thanks, Tom and good afternoon, everyone. Our Q4 results were strong continuing the recovery began in Q3 of this year.
While gross revenue for the fourth quarter declined by four 8% for <unk>.
$96 9 million to $92 2 million net revenue net of subcontractors and materials and other direct cost increased two 1% to <unk> 51.
$8 million versus $50 8 million in Q4 of 2020.
The divergent directions for gross and net revenue are a result of the shift in the mix of revenue.
The increased revenue from led DWP was offset by lower construction management revenue.
The decline in construction management revenue as a result of project completions earlier in the year, not yet being offset by the startup of new projects. Despite the robust backlog of new contracts.
Gross profit for Q4 of 2021 was unchanged from Q4 of 2020 is $34 5 million below the gross profit margin was slightly better at 37, 7% versus 35, 6% in 2020 due to the change.
Mix of revenue.
G&A costs for the quarter were $6 6 million or 16, 5% lower than a year ago declining from $40 2 million to $33 6 million for Q4 of 2021. This was driven primarily by lower stock compensation and lower interest accretion charges related to.
Contingent consideration adjustment made in Q4 2020.
The lower G&A expense was a primary driver for the turnaround in income before income taxes from a loss of $5 9 million in Q4 of 2020 to income of 500 K in Q4 of 2021.
The $1 1 million noncash adjustment to our deferred tax valuation reserve related to certain state tax Nols cause income tax expense to exceed pre tax income for the fourth quarter, creating a net loss of 900 K compared to a loss of $4 1 million in the same period.
As of 2020.
For the quarter adjusted EBITDA increased by nine 7% to $9 4 million or 18, 2% of net revenue compared from eight.
$8 6 million or 16, 9% of net revenue a year ago.
Our adjusted earnings per share were <unk> 47 per share for Q4 of 2021 compared to <unk> 46 per share in 2020.
For the year gross revenue declined nine 5% from 391 million to $354 million, but net revenue increased by three 6% from $1 $95 million to $202 million in fiscal 2021.
The change in that mix of revenue sources again accounts for this different trajectories of gross and net revenue.
The mix of revenue also accounts for the improvement in gross profit margin when compared to the same period in 2020.
Gross profit in 2021 increased 5% to $135 9 million or 38, 4% of gross revenue versus $129 4 million or 33% of gross revenue a year ago.
G&A costs for the year were essentially flat at $144 6 million versus $145 6 million in 2020 with higher salaries and wages being offset by lower facility and other expenses.
The higher gross profit and flat G&A expenses were the primary drivers behind a 41, 9% reduction in the reported net loss from a $14 $5 million loss in fiscal 2020 to $88 $4 million loss in fiscal 2021.
Excuse me as a result of an increase in various deductions and credits.
Our effective tax rate was a credit of 32, 1% versus 26, 3% in 2020.
Adjusted EBITDA for 2021 was $27 5 million compared to $28 1 million a year ago and adjusted earnings per share were $1 55 compared to $1 30 in 2020.
Okay.
Yes.
The changes in our balance sheet and cash flow from a year ago reflects the changing mix of revenues.
The impact of the restarted the DWP program the startup of the new California, IOU programs and continued debt reduction.
Cash provided by operations was $9 8 million for the year.
Expenditures were $8 5 million for the year, primarily for software development and ICU related equipment.
Scheduled principal payments on our term loans and earn out payments, resulting from successful acquisition performance.
So the majority of the $18 5 million.
Used in financing activities.
Yes.
On March eight we amended our credit agreement with our five bank consortium to better match, our expected cash flows.
Related covenant metrics with our expert.
Excuse me with our expected growth related working capital needs in 2022.
Under the terms of the amendment, we draw on the remaining $20 million available under the delayed draw term loan facility, leaving the full $50 million line of credit available.
To support liquidity and expected growth during the year camera a glass of water. Thank you.
Jim drive asset.
That helps.
Yeah.
The amendment also adjusts our covenants to ensure an adequate margin for compliance obligations.
Throughout the end of fiscal 2022, when the amendment provides for a return to the covenants under the original credit agreement.
We're pleased with the support and cooperation of our banking partners as we prepare for our expectations of substantial growth in fiscal 2022.
Looking ahead to fiscal 2022, we're expecting net revenue and adjusted earnings per share to grow by approximately 20% over 2021, and adjusted EBITDA to grow by about 50%.
We estimate our effective tax rate will be approximately 25% for the year and weighted average shares outstanding will average $13 4 million.
We expect the year started slowly in Q1 and continue the ramp in each subsequent quarter as we ramp up the new utility programs and expand construction management activities.
We expect the first half of the year to provide about 25% of the full year earnings as revenues trail costs under the new programs.
75% of the earnings to be realized in the second half of the year.
We expect that ramp to continue into <unk>.
And throughout fiscal 'twenty, three and beyond on the strength of the contracted backlog.
Operator, we're now prepared to answer your questions.
Thank you.
I'd like to ask a question. Please press star one on your telephone keypad and if you're on speaker phone. Please make sure. Your mute function is turned off for like a signal to reach our equipment again press star one to ask questions.
And we will go first to Marci cadre of Wedbush.
Hey, Thanks, guys nice quarter.
So just to.
Confirm we're gonna have a bit more than usual of a backend loaded year can you talk a bit about.
The costs associated with ramping some of the new contracts, how would that kind of.
Impact margins during the first half.
You'll have a lot of stuff I guess still getting redeployed to deploy here that came on board, maybe talk a bit about wage inflation.
And how is the outflow how is that actually factored in some of the contracts that you have.
Terms of the ability to recoup some of that.
Yes.
Sure Moshe I'll start this is Mike.
Kim you fill in where I Miss something.
First Tom mentioned, we have hired about 200 people in last year and now are at full strength to do the work that we have lined up for 'twenty twos all of those people have been hired so we already know what the cost is theres not future cost risk, we think of 22 one labor.
Because we've already hired those people.
That's first second were carrying.
Roughly 150 people to operate the California utilities, and we did approximately $1 billion of revenue last year, obviously that cost doesn't cover those types of people.
That cost is going to go with us.
Throughout the first half of the year minimal contribution in Q1, a little more revenue in Q2.
<unk> contribution is in Q3 and Q4.
That's.
That schedule is aligned with our contracts that we've signed with these California IOU use they have.
Specific delivery schedules and milestones in the so we built our forecast for 'twenty two around those milestones and those contracts there's.
Theres not a lot of subjectivity or mystery about them at this point, we are well underway.
We're pleased with the way things are ramping up.
Does that answer your question.
Yeah and then.
Just to confirm any sort of recruiting costs that we'll be able to actually let you Ram.
'twenty two it's already been factored in the P&L at this point.
Yes. It has correct we don't expect substantial hiring from this point forward, we have the people on staff we need.
Understood and then.
You can measure attrition.
And your current staff has that been changing anyway.
<unk> has we monitored it and like a lot of companies that did go up somewhat.
In 'twenty, one and 'twenty, two sorry, 2020 , one to two COVID-19 years.
That was consistent with all of the industry data that we looked at and so in spite of that attrition.
We replaced all of those people that have added 200 more.
Okay, and where are we at the attrition on the Attritional level right now.
Voluntary was coming down last I saw it was around 15% voluntary.
And if you have any further questions. Please rejoin the queue at this time well go next to Craig Irwin of Roth Capital Partners.
Hi, good evening and thanks, Thanks for taking my questions.
So.
Can you maybe clarify clarify for us in your guidance what do you expect this year as far as revenue from the California, IOU IOU contracts that you signed.
The last 18 months.
How much of <unk>.
<unk> 2022 guidance.
Is from these contracts.
Yeah.
At the gross.
Gross revenue level that will be approximately $50 million.
Okay understood. So you are pretty clear about the higher costs.
Chart up in this business.
How do we gauge confidence or how do we gain external confidence.
Theme of higher costs will taper down. This this is something we've been talking about I think for two years now.
Higher costs higher costs I know Covid was.
Horrible thing for everybody to deal with.
But what gives you the confidence that we'll see the execution on higher costs, becoming less high costs in.
In the back half of the year.
I'll try to take that Craig.
Two primary cost to our business that will separate we'll talk about labor.
And then equipment and materials.
The labor cost now we've already defined for the business. We know what that is going in we didn't know necessarily in Q3 or even in early Q4 of last year, but now we do.
And we factored that into guidance.
And you see that flowing through most of the Q4 results actually.
So that's the labor that's the largest component second largest component of course is.
Equipment and materials.
Those costs have raised it depends on what youre doing anywhere from 5% to as high as 15% 20%.
The costs in general have been able to be pass through our business.
Lots of the customer.
We've been able to do that we have not seen margin erosion at the project level thus far.
It has happened, though is the second part which is supply chain duration delays.
We think that I would say that as a percent complete basis, we would be 10% or so ahead of where we are right now where we're not waiting on equipment to be delivered at our project sites around the country. So that's the biggest change that has occurred is the delay of.
Materials that we install on job sites.
At this point does that answer your question.
Believe me completely so last question if I may many of your shareholders own the stock for.
More than $1 billion and additional work that is expected to be awarded over the next couple of years on both.
Both in California and in other markets.
And your leadership as far as your very healthy share.
But your tough.
The IOU work.
So, California energy efficiency.
Yeah.
What would have you maybe a bit differently.
This work.
This scope of work that's in front of us.
What would have you bid differently.
Maybe to pursue higher natural margins.
Or at this point is there nothing that you would change as far as the way that you are.
Chasing that the broader longer term opportunity.
Well I would love to tell you, what we would change, but we will be telling our competitors what we negotiated.
There wasn't a lot of negotiating room.
Sure.
Variable, let's call it that.
The state.
Do you see the utilities headset, we need to beat this number.
And if you don't beat this number.
It came in at the Trc, primarily.
Total resource costs.
We have to put in measures that are cost effective let's say.
There wasn't a lot of negotiating.
So Tom asked usually the public the public utility commissions right. When you do see work and things did not contain the profit profile that is forecast.
Come back go back and get change orders right and this is done regularly some.
Transmission line companies are more liberal in their pursuit of change orders and they bid more aggressively on the price upfront nagle for change orders.
There has been higher and our.
Known as a bit higher.
Not very frequently in front of the commission asking for change orders.
Is there an opportunity for us maybe to see remediation on the profitability of these projects.
With change orders given that things are are obviously tracking.
Hello.
What was generally expected.
When all of this work was was laid out so be it.
Yes, we have seen in the utilities.
Talk about change or maybe the wrong word but changes in contract terms because of Covid. So what we've done is we're kind of sampling in the market and some of these contracts.
And showing improving that.
Let's take the real small business.
They are just not interested in energy efficiency.
So there is room for renegotiation when you've improved the utility that the world has changed and and the utilities are coming to the table, saying the world has changed so does that answer your question Craig.
Well there is a very special company right your execution in energy efficiency is highly unique.
And you're committed to the success of what the California Utility Commission has said.
As far as some pretty aggressive goals.
That reach beyond some underperformance in the utilities over the last many years.
And the special status of will then.
It is something as I as a company either public or private is a legitimate.
Expectation that you can earn a minimum level of profitability on your contracts.
And you know it seems like.
The guidance, maybe just being up a little bit lighter than most where we're looking for.
But that would be a very clear and fair thing to get in front of the commission with given that they want people to actually bid on the next round of work incentive refusing to do it and let them go back to the dysfunctional models that they were you using two to execute so called energy efficiency in the past and you've called out you fall.
All of my logic.
I'm, just looking I'm looking for potential ways to get the recourse ware.
Some serious effort and engagement from one of the leading experts is compensated fairly.
And it doesn't it doesn't seem like that.
With the guidance that you shared with us today.
The guidance.
I was glad with you until you said the guidance we shared with you.
Okay outlook for 'twenty two.
You mean do you think the margins should be higher do you think the revenue should be higher what is that.
I think the margins I think the margins are tracking below where they should be.
And there is probably a frictional costs.
The margin line that are probably not included in the contracts that should have been in the first place.
And the startup costs really needs to be carried as a burdened by the utilities because.
That is a functional piece of the total equation.
And you know it.
California has committed to the success of their energy efficiency programs, they need to take a holistic view.
And you know they've got the best Guy in the market working on this.
Right.
The profitability is not what many people would believe fair natural profitability should be given that you're carrying on European all the expensive. These employees on startup when you know there should be.
Not the impact of dilution, but maybe a breakeven or modest.
Profit.
Ahead of.
A very large scope of work that has to get done I mean, theres a lot that they really want to see you do that I know you're going to do a great job on.
You follow my logic.
Oh yeah.
Yeah.
We love startup costs, but there's contracted included so we got it.
And our price that we gave them and we have to deliver.
So what we're working on Greg is we're just getting started.
Once we deliver I think our voice will get stronger.
And we will have a better negotiating position.
How do you think that I'm trying to build.
The other thing Craig is that the volume the way.
The programs are actually designed and the way they were bid.
The volume of revenue, we can claim that the first part of the year is very low not covered our cost margins pick up substantially as that volume comes up.
So we don't have a margin problem when we hit.
Even close to the run rates that these programs will perform over the few years and even in the back half of this year as we're ramping up remember that as Kevin pointed out 50 million in revenue is one third of the average volume we have to have on these projects over the last four over the next four years.
So we're going to have a substantial ramp even in 'twenty. Three we just were unable to convince them to pick up the start up costs. That's the way. They were designed so there hasn't been anything that we didn't expect or that was.
Out of the design of the programs as we signed the contracts.
We just need more volume.
And Thats time, I mean, we're a little behind we were behind because of.
Covid were behind it because of the California was delayed.
And we started it.
The world does that start.
Al.
We'll catch it up.
And thank you Mr. Irwin if you have any further questions. Please rejoin the phone queue.
Well go next to chip Moore of pattern.
Good evening, thanks for taking the question.
Just wanted to follow up that one.
On the California, IOU revenues, so $50 million in 'twenty two.
To your point about a third of the volume over the next.
That's a pretty sticky.
Stefan.
Let me say in the coming years are there any limiting factors need to sort of what's the realistic figure for 'twenty three if you will.
That you could have if everything is humming.
Yes chip.
Three.
The number will be between $150 million to $200 million in revenue from the California, IOU for contracts or something like that.
Thats set forth in the goals of the contracts.
Got it Okay, and then just a.
Couple of minor ones for me.
You talked about L. A D WP they have some unused funds from when that program set down.
Any way to think about potential magnitude.
Would that be potential upside.
It is theirs.
I don't know if this is a public number so I'm not going to give them. We know the number there is a more than $100 million.
Of additional outer spend money how about that.
They've given us all the numbers they have recently expanded the scope that we're serving and we continue to look with the customer at ways to expand the program. So that we can fully extend the dollars. They have in the contract and have charged the public for the.
Customer support have been doing that and so there is potential upside there.
Yes.
None of that is in the guide.
None of that's in the guidance correct yeah, Okay, just one last one.
<unk> software I think you were talking about $10 million for the year is that.
Where it came in and are you expecting sort of similar.
For this year.
Yeah, there were a little above that chip I think they were closer to 11 million for the year. They had an outstanding 2021.
And.
We would expect that number to grow frankly in 'twenty two the pipeline of opportunities for software is very good.
And even into Q1 Q2.
I think we'll signed some new licenses and bring in some new customers it looks good.
Got it okay. No. That's helpful. Appreciate it thanks guys.
Okay.
And as a reminder, please press star one if you would like to ask a question at this time, we will go next to Marc Riddick of Sidoti.
Hi, good evening.
Yeah.
Wanted to touch on a couple of things first of all I appreciate the.
The the guidance provided as far as the visibility I wanted to touch a little bit on that because it seems as though with all the pieces that you've kind of mentioned there it seems as though our.
Overall visibility for you is meaningfully.
Proved over the last three to six months and from that vantage point.
Is there is there any kind of swing factor that you were looking at.
That is still.
But it's still a bit iffy to you as to how youre looking at numbers going forward not just around the 22 got but what specifically is there any particular issue that you are looking at is a major swing factor to what you're currently expecting.
No theres not Mark I would say that we've never been a disposition before we booked.
Oh, I won't say all but this.
The overwhelming majority of work that we need to book this year and we've never been in a stronger position, we've never been as strong a position as like this so it's not unusual and it's not only this year, it's throughout 2023 and even in 2024, so it's all about execute.
Right now, it's really not about winning work.
Ever been in this position before so very good.
Excellent and then the extra P J and I appreciate you mentioning some of the supply chain constraints on sort of where you are on timing and things like that I was wondering were there any meaningful or any visible impacts from Amazon that slowed things down as well as far as operations.
Supply chain has slowed certain projects, especially the when you're delivering more complex equipment.
Like custom built boilers chillers large gear for universities.
Hospitals that type of equipment is being delayed.
We're working closely with our customers.
As I mentioned, we might be 10, or so percent hit on those projects on average if we didn't have those types of delays.
Customers are understanding it has not resulted in cost escalation, though for that complex equipment.
Okay, and any omicron impacts.
Those are abating I can't think of any that were substantial in Q4.
Okay.
Alright.
I appreciate it thank you.
And we will go to our next question from Richard.
Investor.
Hi.
Good afternoon.
Cynthia after I Richard can you speak a little louder, Yeah can you hear me now.
Yes, Sir.
Yeah.
Since you expect in 2023 for them.
The contribution from California to increase between $150 million and 200 million isn't it.
Logical to assume that you should make more than $3 in EPS in 2023.
[laughter] long ways away for guidance.
So.
You can you can apply your logic, we're glad we're.
We're not going to give guidance as far as as we've told you where the revenue is expected to go with.
That's where we live.
Okay. Okay. Thank you.
Thank you.
Yeah.
And with no further questions in the queue I would now like to turn the call back over to Tom Brisbin for any additional or closing comments.
I just want to thank all our investors employees for all their phone and we will see you again next quarter.
Thanks, a lot.
Yeah.
And this concludes today's call. Thank you for your participation you may now disconnect.
Yeah.
[music].
Yes.
Okay.
Yeah.